Oil income helps Russia pay off entire debt to Paris Club - Business - International Herald Tribune

MOSCOW — Russia paid off the last of its Soviet-era debt to the Paris Club of creditors Monday, a highly symbolic move that underscores how much oil and natural gas revenues have done for the nation's economy eight years after it went into default.

The Finance Ministry said in a statement that it had transferred the last tranche - $21.6 billion - to the club's 17 members.

Separately, Russia's state-owned foreign trade bank, Vneshekonombank, said it had transferred $23.7 billion over four days in order to convert the tranche into nine different currencies. The higher figure includes a $1 billion penalty for early repayment, as well as money for currency fluctuations.

As a result, Russia stands to save $7.7 billion in interest payments over all from the early retirement of the debt, which the government plans to spend on infrastructure projects. In May 2005, Russia paid back $15 billion.

"The early settlement with creditor countries was possible thanks to the Russian Federation's growing financial and economic might," the ministry said. Early payment "would strengthen Russia's international authority."

The deal itself was brokered in June - a public relations coup ahead of the Group of Eight summit meeting, to which Russia played host in St. Petersburg in July.

After relying on foreign loans for much of the 1990s and defaulting on its sovereign debt, Russia's finances are in good health, thanks to record prices for oil and natural gas - its main exports.

In the six years since Vladimir Putin became president, Russia has earned hundreds of billions of dollars from oil and natural gas sales.

A budget surplus of $56 billion is projected for next year and hard currency reserves are the third-largest in the world, after those of Japan and China, at $277 billion. The economy is growing at a healthy clip of 6 percent to 7 percent annually, transforming the once-dour capital into a gaudy, glitzy boom town.

"Eight years ago, the problem was: How do you pay back the debts when you don't have the revenues? Now the question is: How do you spend this money without it being inflationary?" said Roland Nash, an analyst with Renaissance Capital investment bank in Moscow.

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"It's a fantastically different problem to the one they had eight years ago," he said. "Who would have guessed they would have this metamorphosis?"

The biggest recipient is Germany, which will also receive the bulk of the $1 billion premium Russia agreed to pay in lieu of forgone interest, with France, Britain and the Netherlands to share the rest.

The repayment also helps insulate Russia's economy from the impact of oil export revenues, which have increased money supply and driven up the price of property, stocks and luxury goods.

After the sovereign repayment, Russia still has unfinished business dating back to the Soviet era. The Finance Ministry will next month offer to swap $600 million in debts to commercial creditors into Eurobonds.

Analysts said the repayment Monday had strengthened an already strong case for international ratings agencies to upgrade Russia.

"It's a very symbolic step for Russia as a country," said Zsolt Papp, emerging markets economist at ABN AMRO in London. "It strengthens the case for a ratings upgrade."

Standard & Poor's upgraded its sovereign rating on Russia last year to BBB with a stable outlook. Fitch rates Russia BBB+ and Moody's Baa2, both with stable outlooks.

An S&P credit analyst, Moritz Kraemer, said that the deal by itself would not trigger a further ratings upgrade since considerable downside risks remained on the fiscal and political front.

"Russia may be virtually debt-free," he said, but the risks "are of a different kind, emanating from the political scene and predictability of policy."